Occupy Economics Departments

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On the Commons

Occupy Economics Departments

Conventional economists have a lot to answer for but will they listen?

On November 2nd nearly 70 students walked out of an introductory economics class at Harvard in solidarity with the Occupy movement. The mainstream media largely ignored the protest. That’s regrettable since the economics profession has provided the intellectual framework and justification for the inequality and centralization of corporate power the Occupiers are challenging.

“You can’t get into so disastrous a situation as we are in now without extraordinarily bad thinking and the economics departments were the source of that bad thinking,” observes Steven Keen, Professor of Economics at the University of Western Sydney and author of Debunking Economics.

The Harvard students were protesting EC 10. The course is taught by Professor N. Gregory Mankiw, author of the world’s best selling economics textbook, Principles of Economics, former Chairman of the Council of Economic Advisers under George W. Bush and regular New York Times columnist. A prerequisite for social studies and economics majors, the class may be taken by nearly half of all Harvard students before they graduate.

“Today we are walking out of your class, Economics 10, in order to express our discontent with the bias inherent in this introductory economics class,” the protestors explained in a letter to Mankiw. The course “espouses a specific—and limited—view of economics that we believe perpetuates problematic and inefficient systems of economic inequality in our society today.”

On December 3rd Mankiw responded in the Times. He expressed “sadness at how poorly informed the Harvard protesters seemed to be”. “If my profession is slanted toward any particular world view, I am as guilty as anyone for perpetuating the problem. Yet, like most economists, I don’t view the study of economics as laden with ideology.”

Quoting Keynes, Mankiw maintained he teaches “a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.”

Regarding Mankiw’s insistence that his textbook and course simply instruct students in “a method rather than a doctrine” Moshe Adler, Professor of Economics at Columbia University and author of Economics for the Rest of Us notes the singularly consistent conclusions that result from the application of that “technique of thinking”. “(W)henever it is necessary to choose sides between the rich and the poor, between the powerful and the powerless, or between workers and corporations, economists are all too often of one mind…”

The Consistent Conclusions of Conventional Economics

Consider the issue of inequality. “We economists can try to estimate the cost of redistribution—that is, the negative impact on efficiency that comes with attempts to achieve more equality,” writes Mankiw. “But in the end, picking the best point on the tradeoff between efficiency and equality comes from policy preferences about which we, as economist must be agnostic.”

Translation. The economist’s role is to help us understand that we will all be poorer if we reduce inequality but to abstain from advocating specific polices. Of course, no economist worth his or her salt, including Professor Mankiw would refrain from advocating specific policies.

“Reasonable people can disagree about whether and how much government should redistribute income,” Mankiw’s observes. “But don’t let anyone fool you into thinking that when the government taxes the rich, only the rich bear the burden.” We can tax the rich but the result will be a smaller overall economic pie.

In 2001 Mankiw wrote a blistering Op Ed in the Boston Globe decrying a student sit-in aimed at gaining a living wage for janitorial staff. “The living wage campaign wants to repeal the law of supply and demand”, Mankiw insisted, as if the “law” of supply and demand were actually a law and thus more incontrovertible than, say the theories of evolution or gravity. If Harvard were to pay its janitors more, Mankiw predicted, the result would be lost jobs, more teenagers dropping out of school and fewer adults making the transition from welfare to work.

In his Presidential Address to the American Economics Association (AEA) Mankiw used economics-speak to explain why janitors don’t deserve a living wage while Wall Street executives deserve billions. “Under a standard set of assumptions, a competitive economy leads to an efficient allocation of resources…it is also a standard result that in a competitive equilibrium, the factors of production are paid the value of their marginal product. That is, each person’s income reflects the value of what he contributed to society’s production of goods and services. One might easily conclude that, under these idealized conditions, each person receives his just deserts.” Oh.

Before Mankiw, EC 10 was taught by Martin Feldstein former Chairman of the Council of Economic Advisers under Ronald Reagan. Feldstein used Mankiw’s book as his text. In 2004 Feldstein’s Presidential Address to the AEA focused on health insurance. He informed his colleagues that the principal problem facing the health system isn’t its lack of universal coverage but low deductibles and copayments that encourage people to visit the doctor too often. In economics jargon, “They (low payments)…lead to an increased demand for care that is worth less than its cost of production.”

Professors Mankiw and Feldstein, of course, would not consider any of these conclusions biased or ideologically driven. That they always favor the rich and powerful and disfavor the poor and weak must be chalked up to simple coincidence.

The Conclusions From Unconventional Economics

Those who rely on a different “way of thinking” often arrive at diametrically opposite and far more equitable conclusions.

Consider Feldstein’s thesis. Americans actually visit doctors less often than their counterparts in countries with universal health coverage. Yet the level of medical spending in those countries is 30-50 percent less than ours and achieves better outcomes. Might one conclude that enabling Americans to visit their doctors more rather than less could improve the efficiency of the overall system? If people don’t see a doctor they can end up in vastly more expensive hospital beds. Sometimes common sense trumps complex models.

In his 2001 column, Mankiw dismissed the widely disseminated finding by economists David Card and Alan Krueger in Myth and Measurement that raising the minimum wage does not reduce employment. Mankiw considered them outliers and noted that many economists had “attacked their data, methods and results”. Indeed they did, often and aggressively. For as John Cassidy pointed out, “Card and Krueger didn’t just question the conventional wisdom; they attacked it in a novel and powerful way. Instead of concocting a mathematical model and `testing’ it with advanced statistical techniques, which is what most economists call research, they decided to test the theory in the real world.”

Recently Arindrajit Dube, Assistant Professor of Economics at the University of Massachusetts Amherst and an expert in studies of the effects of minimum wage policies reviewed the impact of Card and Krueger’s work. Their methodology as well as their empirical results have stood the test of time, he concludes. Indeed “today, writing a paper arguing that moderate increases in minimum wage do not have any appreciable effect on jobs because the labor market exhibits search friction is not a conversation stopper or a career ender.” Perhaps raising the minimum wage reduces turnover and hiring and training costs? Just a theory. Not a law.

Mankiw insists that workers are paid based on how productive they are. “Our real wages are ultimately determined by our productivity.” Yet the evidence argues that the proportion of the wealth generated by increased productivity that accrues to labor is highly dependent on the percentage of the work force that belong to unions. As union membership has dwindled and workers are forced to negotiate as individuals with ever-more-powerful and mobile corporations that proportion has plummeted while corporate profits are at an all time high.

Mankiw and other conventional economists argue that increasing taxes on the rich reduces economic growth and dismiss the idea that lowering taxes on the wealthy has played a significant role in increasing inequality. Recently two Professors of Economics, Thomas Piketty and Emmanuel Saez examined data from 18 OECD countries and came to the opposite conclusions. They found little evidence that low taxes on the rich raise productivity and economic growth. And they found “a strong correlation between the reductions in top tax rates and the increases in top 1% pre-tax income shares from 1975–79 to 2004–08”. For example, the U.S. slashed the top income tax rate by 35 percent and witnessed a large ten percent increase in its top 1% pre-tax income share. “By contrast, France or Germany saw very little change in their top tax rates and their top 1% income shares during the same period.”

And in what can only be considered a direct repudiation of virtually all conventional economic theory, the researchers’ rigorous analysis estimated the top tax rate could be as high as 83% without slowing economic growth.

The Economic Crisis And Conventional Economics

How has the economic crisis changed what Mankiw offers in his freshman course? “…not as much as you might think,” he answers. “Despite the enormity of recent events, the principles of economics are largely unchanged.”

Mankiw does admit that the precipitous collapse of most western economies has convinced him to entertain some “subtle” changes. For example, he might introduce a few overlooked factors into his course such as the role of FINANCE or the importance of LEVERAGE.

Many economists who are not slaves to conventional economic models with their “standard assumptions” and “idealized conditions” recognized the importance of these issues long before the crisis. In 1994, for example, Marxist economist Paul Sweezy told Harvard economic graduate students. “In the old days finance was treated as a modest helper of production. By the end of the decade (1980s) the old structure of the economy, consisting of a production system serving a modest financial adjunct, had given way to a new structure in which a greatly expanded financial sector had achieved a high degree of independence and sat on top of the underlying production system.”

In 2001, economist Steven Keen bluntly challenged conventional economics. “An economic theory that ignores the role of money and debt in a market economy cannot possibly make sense of the complex, monetary, credit based economy in which we live.”

What about the failure of the economics profession to forecast the economic collapse? Mankiw concedes, “It is fair to say that this crisis caught most economists flat-footed.” But he insists; “Yet this is no reason for embarrassment….Some things are just hard to predict.”

Mankiw is certainly correct that most conventional economists were caught flat-footed. Indeed, many boasted that their “method not a doctrine” had led to policies that had achieved enduring prosperity and stability. The “central problem of depression-prevention has been solved,” declared Nobel Prize winner Robert Lucas in his 2003 Presidential Address to the AEA.

Before 2008, conventional economic theory championed the deregulation and expansion of the financial sector as a strategy to enhance economic efficiency and lower risk. It taught us that speculation is not a problem because all of the actors have all the information necessary to make the right decision.

It ignored the tsunami of increasing private debt while concentrating its attention and disapproval on a much slower growing public debt.

“The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risks to those best able to bear it, self-regulation works best and government intervention is ineffective and harmful,” Dani Rodrik, Professor of Economics at Harvard comments.

Again Keen is more blunt. “Neoclassical economists were effectively trained to not see this crisis coming, by theoretical fallacies that led them to ignore crucial real-world phenomena like the ballooning levels of private debt, and rampant speculation and fraud in the private sector.”

In 2003, when Feldstein taught EC 10, students first rose up against its perceived bias. Some 700 students and alumni signed a petition asking Harvard to offer an alternative economics course. After much deliberation, Harvard agreed, but refused to allow economics majors to receive credit for taking the alternative course.

Economics Professor Stephen Marglin teaches the alternative class. The author of The Dismal Science he believes the methods of economists do embody a doctrine. Their assumptions embody certain values and predetermine outcomes.

In an interview Marglin points out several potentially fatal flaws in conventional models.

It is highly misleading about how society actually works. Not only do you have to leave out all the fine print about monopoly and oligopoly, externalities, public goods, asymmetric information…you have to separate individuals, focus on the individual, and leave out of the analysis the connections between individuals. You have to leave aside the limits of rational calculation. You have to assume that it is human nature always to want more, never to be satisfied with ‘enough.’ … you have to assume these rational, isolated individuals are completely self-interested. Because as soon as they are not self-interested anymore-even if that non-self-interest takes the benign form of altruism-then the theorems about Pareto optimality, the efficiency of markets, break down.

Marglin addresses an issue ignored by most economists: the effect of their models and the policies derived from them on our sense of community. How Thinking Like An Economist Undermines Community is the subtitle of his book.

“Community is important to a meaningful life,” he maintains. “Community is about human connections; we need community to foster and maintain these connections. And we are diminished as our human connections are diminished.” “The economics we have constructed makes it virtually inevitable that we will leave community out of consideration when we ask questions about economic policy.”

He offers students advice that would be considered heretical in a conventional economics course. “Choose very carefully which markets you will allow and which you will not in terms of what they do to communities.”

Remember. It’s the Bank of Sweden Economics Prize not the Nobel Prize

A few weeks ago the Nobel Prize for Economics was announced. The press dutifully noted that it wasn’t one of the official Nobel Prizes inaugurated in 1901. Yet the media continue to call it the Nobel Prize rather than by its actual name: The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel.

Knowing that the prize is issued by a bank might help people understand why, since its inception in 1969, 70 percent of these economics prizes have been awarded to Americans compared to only 39 percent of the real Nobel Prizes in chemistry, physics, literature and medicine. And why ten have been won by University of Chicago faculty.

The study of economics may indeed help us understand the world and design appropriate policies. But we need to drop the pretense that economics is a science based on laws and objective models and accept that it is a normative discipline. We need to own up to the bias inherent in conventional economic models and the social damage policies based on those models has wrought.

 

David Morris

David Morris is Vice President and director of the New Rules Project at the Institute for Local Self-Reliance, which is based in Minneapolis and Washington, D.C. focusing on local economic and social development.

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